Allegheny Power 2015 Annual Report Download - page 69

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52
20162017 20172018 20182019*
Legacy
Obligation
Capacity
Performance
Legacy
Obligation
Capacity
Performance
Base
Generation
Capacity
Performance
(MW) ($/MWD) (MW) ($/MWD) (MW) ($/MWD) (MW) ($/MWD) (MW) ($/MWD) (MW) ($/MWD)
ATSI2,765 $114.234,210 $134.00375 $120.006,245 $151.50 — $149.986,245 $164.77
RTO875 $59.37 3,675 $134.00 985 $120.00 3,565 $151.50 240 $149.98 3,930 $164.77
AllOther
Zones
135 $119.13 — $134.00 150 $120.00 — $151.50 35 ** 20 **
3,775 7,885 1,510 9,810 275 10,195
*Approximately885MWsremainuncommittedforthe2018/2019deliveryyear.
**Base Generation: 10 MWs cleared at $200.21/MWD and 25 MWs cleared at $149.98/MWD. Capacity Performance: 5 MWs cleared at
$215.00/MWDand15MWsclearedat$164.77/MWD.
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PJMMarketReform:FERCOrderNo.745DR

OnMay23,2014,adividedthreejudgepaneloftheU.S.CourtofAppealsfortheD.C.CircuitissuedanopinionvacatingFERC
Order No. 745, which required that, under certain parameters, DR participating in organized wholesale energy markets be
compensatedatLMP.ThemajorityconcludedthatDRisaretailservice,andthereforefallsunderstate,andnotfederal,jurisdiction,
andthatFERC,therefore,lacksjurisdictiontoregulateDR.ThemajorityalsofoundthatevenifFERChadjurisdictionoverDR,Order
No.745wouldbearbitraryandcapriciousbecause,underitsrequirements,DRwasinappropriatelyreceivingadoublepayment(LMP
plusthesavingsofforegoneenergypurchases).OnJanuary25,2016,theUnitedStatesSupremeCourtreversedtheopinionofthe
U.S.CourtofAppealsfortheD.C.Circuitandremandedforfurtheraction,findingFERChasstatutoryauthorityundertheFPAto
regulatecompensationofdemandresponseresourcesinFERCjurisdictionalwholesalepowermarkets.TheUnitedStatesSupreme
CourtalsoreversedtheholdingthatFERC'sOrderNo.745wasarbitraryandcapricious,findingthattheorderincludeddetailed
supportofthechosencompensationmethod.

OnMay23,2014,asamendedSeptember22,2014,FESC,onbehalfofitsaffiliateswithmarketbasedrateauthorization,fileda
complaintaskingFERCtoissueanorderrequiringtheremovalofallportionsofthePJMTariffallowingorrequiringDRtobeincluded
inthePJMcapacitymarket,witharefundeffectivedateofMay23,2014.FESCalsorequestedthattheresultsoftheMay2014PJM
BRAbeconsideredvoidandlegallyinvalidtotheextentthatDRclearedthatauctionbecausetheparticipationofDRinthatauction
wasunlawful.However,inlightoftheUnitedStatesSupremeCourt'sJanuary25,2016decisiondiscussedabove,onJanuary29,
2016,FESCwithdrewthecomplaint.

ENVIRONMENTALMATTERS
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Variousfederal,stateandlocalauthoritiesregulateFirstEnergywithregardtoairandwaterqualityandotherenvironmentalmatters.
CompliancewithenvironmentalregulationscouldhaveamaterialadverseeffectonFirstEnergy'searningsandcompetitivepositionto
theextentthatFirstEnergycompeteswithcompaniesthatarenotsubjecttosuchregulationsand,therefore,donotbeartheriskof
costsassociatedwithcompliance,orfailuretocomply,withsuchregulations.

CleanAirAct
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FirstEnergycomplieswithSO2andNOxemissionreductionrequirementsundertheCAAandSIP(s)byburninglowersulfurfuel,
utilizingcombustioncontrolsandpostcombustioncontrols,generatingmoreelectricityfromlowerornonemittingplantsand/orusing
emissionallowances.

CSAPRrequiresreductionsofNOxandSO2emissionsintwophases(2015and2017),ultimatelycappingSO2emissionsinaffected
statesto2.4milliontonsannuallyandNOxemissionsto1.2milliontonsannually.CSAPRallowstradingofNOxandSO2emission
allowancesbetweenpowerplantslocatedinthesamestateandinterstatetradingofNOxandSO2emissionallowanceswithsome
restrictions.TheU.S.CourtofAppealsfortheD.C.CircuitorderedtheEPAonJuly28,2015,toreconsidertheCSAPRcapsonNOx
andSO2emissionsfrompowerplantsin13states,includingOhio,PennsylvaniaandWestVirginia.Thisfollowsthe2014U.S.
SupremeCourtrulinggenerallyupholdingEPA’sregulatoryapproachunderCSAPR,butquestioningwhetherEPArequiredupwind
statestoreduceemissionsbymorethantheircontributiontoairpollutionindownwindstates.EPAproposedaCSAPRupdateruleon
November16,2015,thatwouldreducesummertimeNOxemissionsfrompowerplantsin23statesintheeasternU.S.,including
Ohio,PennsylvaniaandWestVirginia,beginningin2017.DependingonhowtheEPAandthestatesimplementCSAPR,thefuture
costofcompliancemaybesubstantialandchangestoFirstEnergy'sandFES'operationsmayresult.

EPAtightenedtheprimaryandsecondaryNAAQSforozonefromthe2008standardlevelsof75PPBto70PPBonOctober1,2015.
EPAstatedthevastmajorityofU.S.countieswillmeetthenew70PPBstandardby2025duetootherfederalandstaterulesand
programsbutEPAwilldesignatethosecountiesthatfailtoattainthenew2015ozoneNAAQSbyOctober1,2017.Stateswillthen
haveroughlythreeyearstodevelopimplementationplanstoattainthenew2015ozoneNAAQS.DependingonhowtheEPAandthe
statesimplementthenew2015ozoneNAAQS,thefuturecostofcompliancemaybesubstantialandchangestoFirstEnergy’sand
FES’operationsmayresult.
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
53
MATSimposesemissionlimitsformercury,PM,andHClforallexistingandnewfossilfuelfiredelectricgeneratingunitseffectivein
April2015withaveragingofemissionsfrommultipleunitslocatedatasingleplant.UndertheCAA,statepermittingauthoritiescan
grantanadditionalcomplianceyearthroughApril2016,asneeded,includinginstanceswhennecessarytomaintainreliabilitywhere
electricgeneratingunitsarebeingclosed.OnDecember28,2012,theWVDEPgrantedaconditionalextensionthroughApril16,
2016forMATScomplianceattheFortMartin,HarrisonandPleasantsplants.OnMarch20,2013,thePADEPgrantedanextension
throughApril16,2016forMATScomplianceattheHatfield'sFerryandBruceMansfieldplants.OnFebruary5,2015,theOEPA
grantedanextensionthroughApril16,2016forMATScomplianceattheBayShoreandSammisplants.Nearlyallspendingfor
MATScomplianceatBayShoreandSammishasbeencompletedthrough2014.Inaddition,anEPAenforcementpolicydocument
contemplatesuptoanadditionalyeartoachievecompliance,throughApril2017,undercertaincircumstancesforreliabilitycritical
units.OnJune29,2015,theUnitedStatesSupremeCourtreversedaU.S.CourtofAppealsfortheD.C.Circuitdecisionthatupheld
MATS,rejectingEPA’sregulatoryapproachthatcostsarenotrelevanttothedecisionofwhetherornottoregulatepowerplant
emissionsunderSection112oftheCleanAirActandremandedthecasebacktotheU.S.CourtofAppealsfortheD.C.Circuitfor
furtherproceedings.TheU.S.CourtofAppealsfortheD.C.CircuitlaterremandedMATSbacktoEPA,whorepresentedtosuchcourt
thattheEPAisontracktoissueafinalizedMATSbyApril15,2016.Subjecttotheoutcomeofanyfurtherproceedingsbeforethe
U.S. Court ofAppeals for the D.C. Circuit and how the MATS are ultimately implemented, FirstEnergy's total capital cost for
compliance(overthe2012to2018timeperiod)iscurrentlyexpectedtobeapproximately$345million(CESsegmentof$168million
andRegulatedDistributionsegmentof$177million),ofwhich$202millionhasbeenspentthroughDecember31,2015($80million
atCESand$122millionatRegulatedDistribution).

AsaresultofMATS,EastlakeUnits13,AshtabulaUnit5andLakeShoreUnit18weredeactivatedinApril2015,whichcompletes
thedeactivationof5,429MWofcoalfiredplantssince2012.

OnAugust3,2015,FG,asubsidiaryofFES,submittedtotheAAAofficeinNewYork,N.Y.,ademandforarbitrationandstatementof
claimagainstBNSFandCSXseekingadeclarationthatMATSconstitutedaforcemajeurethatexcusesFG’sperformanceunderits
coaltransportationcontractwiththeseparties.Specifically,thedisputearisesfromacontractforthetransportationbyBNSFandCSX
ofaminimumof3.5milliontonsofcoalannuallythrough2025tocertaincoalfiredpowerplantsownedbyFGthatarelocatedin
Ohio.AsaresultofandincompliancewithMATS,thoseplantsweredeactivatedbyApril16,2015.InJanuary2012,FGnotified
BNSFandCSXthatMATSconstitutedaforcemajeureeventunderthecontractthatexcusedFG’sfurtherperformance.Separately,
onAugust4,2015,BNSFandCSXsubmittedtotheAAAofficeinWashington,D.C.,ademandforarbitrationandstatementofclaim
againstFGallegingthatFGbreachedthecontractandthatFG’sdeclarationofaforcemajeureunderthecontractisnotvalidand
seekingdamagesincluding,butnotlimitedto,lostprofitsunderthecontractthrough2025.Aspartofitsstatementofclaim,arightto
liquidateddamagesisalleged.Thearbitrationpanelhasdeterminedtoconsolidatetheclaimswithaliabilityhearingexpectedto
begininNovember2016,and,ifnecessary,adamageshearingisexpectedtobegininMay2017.Thedecisiononliabilityis
expectedtobeissuedwithinsixtydaysfromtheendoftheliabilityhearings.FirstEnergyandFEScontinuetobelievethatMATS
constitutesaforcemajeureeventunderthecontractasitrelatestothedeactivatedplantsandthatFG’sperformanceunderthe
contractisthereforeexcused.FirstEnergyandFES intendtovigorouslyasserttheirpositioninthearbitrationproceedings. If,
however,thearbitrationpanelrulesinfavorofBNSFandCSX,theresultsofoperationsandfinancialconditionofbothFirstEnergy
andFEScouldbemateriallyadverselyimpacted.FirstEnergyandFESareunabletoestimatethelossorrangeofloss.

FGisalsoapartytoanothercoaltransportationcontractcoveringthedeliveryof2.5milliontonsannuallythrough2025,aportionof
whichistobedeliveredtoanothercoalfiredplantownedbyFGthatwasdeactivatedasaresultofMATS.FGhasasserteda
defenseofforcemajeureinresponsetodeliveryshortfallstosuchplantunderthiscontractaswell.IfFirstEnergyandFESfailto
reacharesolutionwiththeapplicablecounterpartiestothecontract,andifitwereultimatelydeterminedthat,contrarytoFirstEnergy’s
andFES’belief,theforcemajeureprovisionsofthatcontractdonotexcusethedeliveryshortfallstothedeactivatedplant,theresults
ofoperationsandfinancialconditionofbothFirstEnergyandFEScouldbemateriallyadverselyimpacted.FirstEnergyandFESare
unabletoestimatethelossorrangeofloss.

Astobothcoaltransportationagreementsreferencedabove,FESpaidinsettlementapproximately$70millioninliquidateddamages
fordeliveryshortfallsin2014relatedtoitsdeactivatedplants.

Astoaspecificcoalsupplyagreement,FirstEnergyandAESupplyhaveassertedterminationrightseffectivein2015.Inresponseto
notificationofthetermination,thecoalsuppliercommencedlitigationallegingFirstEnergyandAESupplydonothavesufficient
justification to terminate the agreement. FirstEnergy andAE Supply have filed an answer denying any liability related to the
termination.Thismatteriscurrentlyinthediscoveryphaseoflitigationandnotrialdatehasbeenestablished.Thereare6milliontons
remainingunderthecontractfordelivery.Atthistime,FirstEnergycannotestimatethelossorrangeoflossregardingtheongoing
litigationwithrespecttothisagreement.

InSeptember2007,AEreceivedanNOVfromtheEPAallegingNSRandPSDviolationsundertheCAA,aswellasPennsylvania
andWestVirginiastatelawsatthecoalfiredHatfield'sFerryandArmstrongplantsinPennsylvaniaandthecoalfiredFortMartinand
WillowIslandplantsinWestVirginia.TheEPA'sNOVallegesequipmentreplacementsduringmaintenanceoutagestriggeredthepre
constructionpermittingrequirementsundertheNSRandPSDprograms.OnJune29,2012,January31,2013,andMarch27,2013,
EPA issued CAA section 114 requests for the Harrison coalfired plant seeking information and documentation relevant to its
operationandmaintenance,includingcapitalprojectsundertakensince2007.OnDecember12,2014,EPAissuedaCAAsection114
requestfor theFortMartincoalfiredplant seekinginformation anddocumentationrelevantto itsoperation andmaintenance,